Pound rallies amid upbeat UK outlook

The pound strengthened on Friday, the currency drawing support from an increasingly optimistic outlook for the UK.

Sterling starts this week on the defensive, with GBP/EUR subdued at €1.1631 and GBP/USD retreating to $1.1554. GBP/CAD has slipped to C$1.5750, while GBP/AUD and GBP/NZD have fallen to AU$1.8043 and NZ$1.9868, respectively.

Looking ahead, will a positive Eurozone GDP reading bolster the euro this morning?

What’s been happening?

The pound closed last week on a positive note, with improving UK economic optimism helping to reverse an initial dip in GBP exchange rates.

This Sterling optimism appeared to be underpinned by positive market movements since the appointment of Rishi Sunak as Prime Minister earlier in the week. Falling government bond yields highlighted confidence in the new PM’s fiscal credibility.

The euro remained on the back foot on Friday. EUR sentiment was suppressed by some dovish comments from European Central Bank (ECB) policymakers, playing down the chances of another 75bps rate hike in December.

This offset the publication of Germany’s latest GDP and inflation releases, which both printed above expectations.

The US dollar, meanwhile, initially firmed on Friday as risk-off flows bolstered demand for the safe-haven currency.

However, the release of the latest core PCE price index then erased some of these gains. A smaller-than-expected increase in the Fed’s preferred indicator for inflation denting Fed rate hike bets.

What’s coming up?

In the spotlight at the start of this week’s session will undoubtedly be the publication of the Eurozone’s latest GDP release.

Consensus forecasts predict the bloc continued to grow in the third quarter, albeit at a slower pace than Q2. However many analysts warn the Eurozone may already be in a recession, which if reflected in today’s figures could push the euro lower.

Also of note to EUR investors will be the Eurozone’s preliminary consumer price index. Will another acceleration of inflation bolster ECB rate hike bets and lift the euro?

In the absence of any high-impact UK economic data in the first half of this week, we may see movement in the pound driven by domestic political developments.

Meanwhile, the US dollar may benefit from a cautious mood ahead of the Federal Reserve’s upcoming interest rate decision.